World Business

The greenback’s sudden strength against key currencies may throw back expectations of overseas economic weakness, not courage in U.S. growth

by David Bogoslaw

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The slumping U.S. dollar has resulted in the superlatively good of times for the sake of foreign tourists in the U.S.—and for U.S. outfits that export their wares. Keeping up the Dickensian conceit, it’s besides meant the worst of times for U.S. consumers’ purchasing gift.

The dollar’s sustained degeneration over the past six years, and its plunge in the last year, esteem been all that and more. And that’s made the greenback’s recent comeback vs. other major currencies all the more singular. Some view the dollar’s big bounce over the past week homogeneous to a sign of growing faith in U.S. growth prospects, but it may turn out to be nothing more than a tale of two (or greater amount of) diverging pecuniary policies.

On Aug. 5, the Federal Reserve’s policy committee left the federal funds rate alone at 2.0%. Two days later, the European Central Bank kept its key interest rate steady at 4.25%. The Fed said tight credit, ongoing housing mart contraction, and rich energy prices would probably continue to clog economic growth over the nearest few quarters, and it said it expects inflation to moderate extremely the next 18 months. The ECB seemed again willing to greet downside jeopardy to economic growth in the euro zone, possibly even anticipating Italy’s abrupt economic drawing together Aug. 8, as well as a prospective slowing in Germany’s second-quarter growth estimate.

Investment strategists say they count upon the Fed’s next move to be a rate hike, while the ECB seems other thing inclined to lower rates at least once over the coming year. That view caused the euro to sell off against the dollar on Aug. 8 and to weaken further on Aug. 11. The U.S. Dollar Index, a futures contract offered by the New York Board of Trade that reflects the dollar’s standing vs. other major currencies, rose 0.37% to 76.125 on Aug. 11 after jumping nearly 3.3% during the week that ended Aug. 8.

"[T]he U.S. dollar’s recent rise is largely attributable to market expectations of a bottom in U.S. short-term interest rates, coupled with a diminishing likelihood of further ECB tightening," Alec Young, international fairness adroit tactician at Standard — Poor’s Equity Research Services, wrote in an Aug. 8 note, citing a signifying rebound in the dollar to counterbalance the euro, yen, beat sterling, Canadian dollar, Swedish krona, and Swiss franc from the low of Mar. 17, 2008, when it recorded a 6.7% year-to-date decline.

Currency strategists at Brown Brothers Harriman were quick to declare in an Aug. 8 research note that the dollar’s multiyear downtrend was over, having completed the process of "sculpture at a loss a bottom."

Citing the risible heights that technology stocks reached in the late 1990s and in 2000, the official communication predicted, "we are going to look back with a similar bemusement at the pound trading at $2.10 and the euro in heaven $1.60 and the Australian dollar near parity with the U.S. dollar."

The rebound in the dollar has been driven by momentum traders rather than by longer-term institutional investors, who be delivered of not yet begun to reverse their bets against the dollar, says Meg Browne, senior currency strategist at Brown Brothers Harriman, in any interview with BusinessWeek.com. She cited data upon speculative positions at the International Money Market in Chicago for the week ended Aug. 5.

"I put on’t think people have bought into the model that the dollar is in a longer-term trend uphill against the euro," Browne says. "This is a process that will take a while." Although the euro has put in a top just above $1.60, the currency is likely to attract some buying in rejoinder to this week’s gross domestic product figures for key euro zone economies, Browne predicts.

With the euro breaking in the regions of the dead the native strength of a four-month pass over at $1.5285 on Aug. 8, Browne suggests using corrective rallies in the euro to begin establishing longer-term euro short positions.